Part II. Review of Annual Statement on Developmental and Regulatory Policies for the Year 2005-06

56. The annual policy Statements as well as mid-term Reviews of the Reserve Bank have progressively sharpened the focus on developmental and regulatory policies to strengthen the financial system with a view to ensuring financial stability as a prerequisite for high and stable growth. Rapid changes in technology and the impact of globalisation have necessitated prudent and forward looking policy initiatives for the maintenance of financial stability. The Reserve Bank’s approach has been to reorient its role in the context of the evolving conditions for improving institutional soundness, strengthening the regulatory and supervisory processes and developing the necessary legal and technological infrastructure. While the functions of financial sector regulation and supervision emphasise efficiency, stability and soundness of regulated entities and markets, they also aim at developing a system that is responsive to the needs of all sections of society. In this context, the Reserve Bank is continually broadening its consultative and participative process for wider involvement of all stakeholders in the financial system with a view to encouraging a more informed evaluation of the underlying content of policies.

57. In the context of entrenching financial stability in India, the mid-term Review focuses on certain key areas. First, it is essential to take adequate measures for enhancing delivery of appropriate credit at a reasonable price. Second, there is a need to further develop financial markets and enhance the integration of various segments of the financial markets with proper checks and balances. Third, within the emphasis assigned to credit delivery to agriculture and the small and medium enterprise (SME) sector, developing a conducive environment for micro-finance institutions (MFIs) to cover financial services in addition to credit requires specific attention. Fourth, with a view to ensuring financial inclusion of all segments of the population, in both rural and urban areas, a comprehensive framework to revive the co-operative credit system, revitalise the regional rural banks (RRBs) and reorient commercial banking towards the credit-disadvantaged sections of society assumes high priority. Finally, in order to safeguard systemic stability, sound corporate governance practices, sophisticated risk management techniques and implementation of prudential measures in the financial sector in harmony with global developments need to be focused on. In this regard, there is some merit in assessing the prudential guidelines in the light of developments in business cycles and systems of pricing of risks in different segments. Managing risk-based capital requirement and ensuring robustness of the risk management as well as risk-pricing systems assume importance.

58. The mid-term Review of the Annual Statement on Developmental and Regulatory Policies for the year 2005-06 assesses the progress of measures already taken and proposes some further measures under five sections: